The political pressure to balance the federal budget may force politicians to curtail or even eliminate the home mortgage interest deduction. Momentum is growing toward this end.

Irvine Home Address … 402 FALCON Crk Irvine, CA 92618

Resale Home Price …… $250,000

I feel so good come payday

I think of all the things I'm gonna buy

when I pick up my pay

Don't you know

but then they hand me that little brown envelope

I peep inside Lord I lose all hope

Cause from those total wages earned

down to that net amount that's due

I feel the painful sense of loss between the two

Johnny Cash — After Taxes

The home mortgage interest deduction is a very important tax policy to most Irvine homeowners. The primary beneficiaries of the home mortgage interest deduction are high wage earners with large mortgages — Irvine residents. People with small mortgages don't pay enough interest to itemize. The wealthy don't have large mortgages. If there is any political issue Irvine residents will have an opinion about, it is the home mortgage interest deduction.

I wrote a detailed analysis of the home mortgage interest deduction in Tax Policy and Housing:

Debt subsidies, in particular the home mortgage interest deduction, are seen as a great benefit to home ownership. The benefit is widely overestimated and misunderstood.

First, people fail to understand that to obtain a debt subsidy, you must have debt. You must be making an interest payment on this debt in order to qualify, and you get to reduce your tax burden by a small percentage of the interest amount. In short, you are paying a dollar to save a quarter. There are people who actually seek to maximize their interest payments in order to increase this subsidy. This is really, really foolish. Anyone out there who believes it is a good idea to spend $1 to receive $0.25 in return, please send me as much money as you wish, and I promise to send back 25% of it.

Realtors try to con people with the “throwing your money away on rent” argument. Homeowners buy into the fallacy. Interest is the rent on money. You throw away money on interest just like you throw it away on rent. In fact, people who overpay for housing throw away more money on interest than renters do to obtain the same property, even after the tax subsidy. The only argument one can make for paying extra interest is if you are receiving a return on that investment through property appreciation. We all see how that is turning out.

The main reason the benefits of the home mortgage interest deduction are overestimated is because people forget they must give up the standard deduction in order to obtain it. This is one area where tax policy can have hidden and indirect impact on housing. Changes in the standard deduction greatly impact the benefit of the home mortgage interest deduction. As the standard deduction is increased, the positive impact of the HMID is decreased. In fact, if the standard deduction were doubled, the average American holding a $150,000 mortgage probably would not bother itemizing to obtain the HMID because it would be of no tax benefit at all. This would certainly simplify people's tax returns. A higher standard deduction is also a boon to renters who do not have the option of obtaining the HMID.

When we set up the RentVsOwnulator, we put in a 25% tax benefit from the HMID. Some people have commented that this is too small a number. It is not. Several people have run the calculations both with and without the HMID, and the net difference is only 25% even at the highest tax brackets. Basically, if you want to figure out your real tax benefit, take your highest marginal tax rate and subtract 10%. That will be a much closer estimate to reality. This reduction is caused by losing the standard deduction.

Another facet to the HMID is the cap level. Currently mortgages up to $1,000,000 are eligible for the deduction. Does anyone think this is right? Do you realize you as a taxpayer are subsidizing $1,000,000 mortgages? When the GSEs were set up, they established a conforming loan limit. The reason they did this is because they are mandated to subsidize mid and low income housing. Why is the limit on the HMID any higher than the conforming loan limit from the GSEs? Why are we subsidizing high income borrowers?

If we were to reduce the HMID cap level to $500,000 and adjust it by the CPI going forward, we are still subsidizing relatively high income borrowers ($500,000 is still almost triple the median home price in the US). A reduction in this cap would have the same impact as the lower GSE conforming limit is having: it would lower prices at the high end by eliminating the subsidies.

IMO, the government has no place in subsidizing house prices that are well above the median. One can argue that the government should not be subsidizing anything in housing, but the low and middle income subsidies are here to stay. If we raise the standard deduction and lower the HMID caps, we can greatly reduce the impact of the HMID and the cost we pay for it as taxpayers. This would have the effect of lowering prices on more expensive homes, but it would help stabilize the lower end of the market. That is what the market needs right now.

I also wrote about the home mortgage interest deduction when Shelia Bair noted the home mortgage interest deduction inflates home prices:

There is a much easier way to figure out how much eliminating the home-mortgage interest deduction would cause prices to drop. What is the marginal tax rate of the borrower? Assume that most buyers borrow the most they can afford on a monthly payment basis, and further assume intelligent ones have already factored in the tax savings. If you eliminate the tax savings, people will need to bring their payment down accordingly. This won't have much effect on the lower priced homes because many of those borrowers don't itemize, but in cities like Irvine, elimination of this deduction would cause loan balances to shrink by 25% to 40% to keep the same payment. Since about 80% of the house price is usually financed, this will lower prices 20% or more.

There is a related issue which isn't often discussed but very important to the housing market. If the home mortgage interest deduction were eliminated, many high wage earners who are underwater would strategically default. First, it would eliminate one of the financial benefits that prompts many to hang on. Second, since most high wager earners who are underwater would realize this will depress home prices in their price range, many more will abandon hope of a recovery and also strategically default.

When this issue was being discussed last year, it really worried the realtor community. In what can best be termed hysterical, California realtors claimed eliminating the mortgage interest deduction would devastate the nation.

The issue is back in the news again, and due to the large federal government budget deficits, some changes to the provisions of this deduction may actually come to pass.

A Taxing Debate: The Mortgage-Interest Deduction

By Ben Steverman – Oct 18, 2011 8:13 AM PT

The mortgage-interest deduction may be your favorite tax break, but be aware that it has some impressive enemies. The fiscal commissions of two different Presidents proposed eliminating it, first in 2005 and then in 2010. There's also a steady stream of research from such places as the London School of Economics and the Brookings Institution arguing that the deduction doesn't boost homeownership, but instead provides incentives for wealthier Americans to buy big houses and take on more debt.

That is exactly what it does.

The home mortgage interest deduction does not boost home ownership because the fringe of home ownership is low wage earners who do not itemize and take advantage of it. If the home mortgage interest deduction were eliminated, it would not impact the home ownership rate in any way.

The deduction does encourage high wage earners to take on extra debt because they are compensated with a tax break. This enables them to increase their bids for real estate and bid up prices higher than they otherwise could and would. In other words, the home mortgage interest deduction inflates home prices in places like Irvine, but it does nothing of value for the rest of society who pays for it.

The people who will argue most vociferously to keep this deduction are existing loan owners who take advantage of it in places like Irvine (don't let me down in the astute observations).

Nevertheless, the mortgage-interest tax deduction survives, fortified in Washington by strong housing industry support and its presumed popularity with voters. Now, according to a recent Bloomberg Poll, a growing number of Americans may be willing to end the mortgage tax deduction — as long as they get something in return. Forty-eight percent of respondents said they were willing to give up all tax deductions, including the home mortgage deduction, in return for lower tax rates for every tax bracket. Forty-five percent were opposed in the survey of 997 adults, conducted for Bloomberg by Selzer & Company.

The results represent a significant shift from a December 2010 Bloomberg survey that asked the same question. That poll showed a majority, 51 percent, opposed to giving up tax deductions, with 41 percent in favor. Given the pressure to lower the federal deficit, “everything is on the table,” says Richard K. Green, director of the University of Southern California Lusk Center for Real Estate. “People are so desperate to figure something out that they're willing to consider anything.”

If politicians believe they have political cover, the home mortgage interest deduction may really be in danger. This is the most momentum I have seen for curbing or eliminating the deduction so far.

Lobbyists versus Academics

The mortgage-interest deduction allows homeowners to lower tax bills by deducting interest on home mortgages from their taxable income. Interest on up to $1 million in mortgages on first and second homes is deductible, along with interest on up to $100,000 in home equity debt.

Lobbyists for homebuilders and realtors vigorously defend the usefulness and popularity of the tax break. Lawrence Yun, chief economist at the National Association of Realtors, says the deduction has “lowered the cost of ownership” and boosted the homeownership rate, which he describes as “the foundation for a very stable, democratic country.” As recently as April, a USA Today/Gallup Poll found that 62 percent of respondents opposed eliminating the tax break.

As usual Lawrence Yun is completely wrong. The home mortgage interest deduction has done nothing to boost the home ownership rate for reasons I outlined above. Further evidence of this comes from countries like Canada which have a higher home ownership rate than the United States without having a home mortgage interest deduction.

If the sentiment in previous polls is an accurate reflection of attitudes, many Americans support the deduction without getting a benefit from it. The deduction has a definite high-income tilt: Only about one in four Americans includes mortgage interest on taxes. Renters and homeowners without mortgages have no interest to deduct, while many lower- and middle-class homeowners receive a standard tax deduction and don't itemize.

Dennis J. Ventry Jr., a professor specializing in tax law at the University of California-Davis School of Law, calls the provision, which costs nearly $100 billion a year, “the most inequitable and inefficient provision in the Internal Revenue Code.” The benefits of deducting interest from income increase with a homeowner's tax rate, he notes. Thus, according to a 2011 study co-authored by Green, 46 percent of the deduction's tax benefit goes to households earnings more than $100,000 per year.

Conservatives always decry the progressive nature of the tax code. Well, the home mortgage interest deduction is the most regressive tax break possible. The more the borrower makes, the more the tax deduction increases. Low and middle income Americans don't gain much if any benefit from this tax break, and of course, renters get none at all.

Unpredictable Effects

Criticizing the mortgage-interest deduction is far easier than calculating the impact of getting rid of it. If, as many argue, the deduction has spurred “overinvestment” in housing, ending the incentive may have negative and unpredictable effects.

The potential hit to the housing economy is a big unknown. Dean Stansel, an economics professor at Florida Gulf Coast University who has studied the deduction for the Reason Foundation, estimates that the tax break inflates housing prices by less than 1 percent; a separate study calculates that it raises prices by 3 percent to 6 percent.

One research paper forecasts serious trouble if the deduction should disappear, predicting that prices could fall from 2 percent to as much as 13 percent, depending on the metropolitan area. Most vulnerable would be parts of the country with higher incomes and higher home prices, which typically benefit most from the mortgage-interest deduction. For example, according to a March 2011 analysis in Tax Notes, residents of Beverly Hills, California, get a $1,873 per person benefit from the deduction, while residents of Clarksville, Mississippi, gain an average of $45 per person.

The research paper mentioned above is probably right. Depending on the area, prices will drop somewhere between 2% and 13%. Locally in Irvine, prices will drop much closer to 13% than 2% because Irvine is much more dependent on the deduction to maintain home values than other areas.

On a personal level, the deduction's biggest beneficiaries will feel the greatest pain if it disappears. Green, of the University of Southern California Lusk Center for Real Estate, estimates that households earning more than $160,000 would pay an average of $2,577 in additional taxes, even after benefiting from a proposed 15 percent tax credit. Places with pricy real estate would bear the brunt of a repeal. “The city of San Francisco would just get whacked,” Green says.

Add Irvine to that list.

Tempting Target

To avoid dire scenarios, Washington would likely do away with the mortgage deduction in a gentle fashion. The tax advisory panel convened by President George W. Bush in 2005 suggested replacing the deduction with a tax credit equal to 15 percent of interest paid. In 2009, the Bowles-Simpson Commission proposed an annual tax credit of 12 percent, limiting interest to first homes and mortgages up to $500,000.

Unlike tax deductions, tax credits can be claimed by all taxpayers, including those who do not itemize their taxes. That could help a greater number of lower- and middle-income people afford houses. Green estimates that a 15 percent mortgage-interest tax credit would boost homeownership by 2.5 percentage points.

I would prefer if we eliminated all tax subsidies on home ownership. Why give a tax credit or a tax deduction? The recent decline in the home ownership hasn't caused any civil unrest, unless you count the occupy Wall Street movement.

Not that I want to see it happen, but I believe Richard Green is right that a 15% mortgage interest tax credit would boost home ownership rates because it would impact the low-income buyers on the fringes.

The mortgage deduction could once again be a target for deficit cutters. According to a 2009 Congressional Budget Office analysis, gradually replacing the mortgage deduction with a 15 percent credit would yield $388 billion from 2013 to 2019. Such savings could prove tempting to the Joint Select Committee on Deficit Reduction, which is charged with finding at least $1.5 trillion in deficit savings over the next 10 years.

The inclinations of this “super committee” are, so far, secret, but the mortgage-interest deduction was discussed at a Sept. 22 hearing. Without making any recommendations, Joint Committee on Taxation Chief of Staff Thomas Barthold mentioned the deduction as an example of a “tax expenditure” that could be eliminated as part of an overhaul of the tax code.

The threat of mandatory deep cuts in defense spending and Medicare if the super committee cannot find enough savings may be the only way that the mortgage interest deduction can die. It's tough to end the tax break, says Green, because the costs are widespread and barely noticed, while the benefits are concentrated in a vocal minority that appreciates the deduction. “It's only in the context of overall reform that you might see something happen,” he says. With public opinion turning, that day may be drawing near.

The circumstances are right for eliminating this deduction. When times are good, eliminating a deduction like this is nearly impossible, but with the realities of a budget ballooning out of control, something has to be done. When something has to be done is when changes as controversial as this one are made.

$7,000 down, $246,00 in mortgage equity withdrawal

The owner of today's featured property demonstrates why houses were so popular during the bubble. The lingering memory of so much free money continues to motivate buyers even today. Fortunately, the crash will grind on, and eventually, people will abandon dreams of free money from houses. When they do, the market will finally bottom.

• This property was purchased on 7/23/1999 for $139,000. The owner used a $132,000 first mortgage and a $7,000 down payment.
• On 3/28/2001 the owner refinanced with a $135,000 first mortgage.
• On 9/7/2001 he obtained a $25,000 HELOC.
• On 2/18/2003 he refinanced with a $192,000 first mortgage.
• On 6/29/2004 he got a $32,600 HELOC.
• On 12/23/2004 he obtained a $60,000 HELOC.
• On 5/3/2005 he refinanced with a $234,600 first mortgage.
• On 8/30/2005 he was given a $75,000 HELOC.
• On 11/29/2005 he refinanced with a $328,000 Option ARM with a 2% teaser rate.
• On 12/11/2006 he received a $50,000 HELOC.
• Total property debt is 378,000.
• Total mortgage equity withdrawal is 246,000.

There have been no notices filed on this property, but since he is selling short, he likely isn't paying the mortgage. This is shadow inventory. It is the kind of borrower which needs to be flushed from the system and the property recycled. The resulting decline in the loan ownership rate will help out this debtor and the rest of the economy.

——————————————————————————————————————————————-

This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 402 FALCON Crk Irvine, CA 92618

Resale House Price …… $250,000

Beds: 1

Baths: 2

Sq. Ft.: 900

$278/SF

Property Type: Residential, Condominium

Style: 3+ Levels, Traditional

Year Built: 1999

Community: Oak Creek

County: Orange

MLS#: S676279

Source: SoCalMLS

Status: Active

On Redfin: 4 days

——————————————————————————

Elegant home in gated Oak Creek featuring a spacious master suite, one and one-half baths, two-car attached garage, and sun-splashed deck! Sparkling kitchen features handsome cabinetry, built-in microwave, and dry-foods pantry. Upgrades include custome tile floors in kitchen and baths, designer carpet, and custom window treatments. Master suite features walk-in close as well as master bath with dual sinks and soaking tub. Enjoy resort-style pools, spas, tennis courts and award-winning Irvine schools!

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Proprietary IHB commentary and analysis

Resale Home Price …… $250,000

House Purchase Price … $139,000

House Purchase Date …. 7/23/1999

Net Gain (Loss) ………. $96,000

Percent Change ………. 69.1%

Annual Appreciation … 4.8%

Cost of Home Ownership

————————————————-

$250,000 ………. Asking Price

$8,750 ………. 3.5% Down FHA Financing

4.18% …………… Mortgage Interest Rate

$241,250 ………. 30-Year Mortgage

$79,205 ………. Income Requirement

$1,177 ………. Monthly Mortgage Payment

$217 ………. Property Tax (@1.04%)

$100 ………. Special Taxes and Levies (Mello Roos)

$52 ………. Homeowners Insurance (@ 0.25%)

$277 ………. Private Mortgage Insurance

$223 ………. Homeowners Association Fees

============================================

$2,046 ………. Monthly Cash Outlays

-$185 ………. Tax Savings (% of Interest and Property Tax)

-$337 ………. Equity Hidden in Payment (Amortization)

$13 ………. Lost Income to Down Payment (net of taxes)

$51 ………. Maintenance and Replacement Reserves

============================================

$1,589 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$2,500 ………. Furnishing and Move In @1%

$2,500 ………. Closing Costs @1%

$2,412 ………… Interest Points @1% of Loan

$8,750 ………. Down Payment

============================================

$16,162 ………. Total Cash Costs

$24,300 ………… Emergency Cash Reserves

============================================

$40,462 ………. Total Savings Needed

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Larry Roberts and Shevy Akason will host a first-time homebuyer workshop at 6:30 PM Wednesday, October 26, 2011, at the offices of Intercap Lending (9401 Jeronimo, Suite 200, Irvine, CA 92618). Register by clicking here or email us a sales@idealhomebrokers.com.

Larry Roberts will be hosting a Las Vegas Cashflow property workshop at 8:00 at the same location. Register by clicking here.

Lenders have resorted to lobbying Washington to let loan owners rob their retirement accounts to repay bad loans from the housing bubble.

Irvine Home Address … 43 SPARROWHAWK Irvine, CA 92604

Resale Home Price …… $579,000

I’m gonna pick up the pieces,

And build a Lego house

When things go wrong we can knock it down

It's hard to admit a mistake, change course, and pick up the pieces left behind. People who bought in the frenzy of the housing bubble made a mistake. A big one. But rather than short sell or allow the house to be auctioned in foreclosure, people will do nearly anything — including sacrificing their future — to avoid admitting the mistake and doing what's necessary to get on with their lives.

Bill would remove penalty for tapping 401(k) to avoid foreclosure

The proposed legislation would amend the tax code to allow homeowners who have 401(k) retirement plans to pull out money to save their houses from foreclosure without the usual tax penalties.

IHB: are they saving their homes from foreclosure, or saving the banks from taking a loss at the expense of their retirement?

By Kenneth R. Harney — October 16, 2011

With hundreds of thousands of homeowners facing imminent foreclosure and estimates of 2 million or more in the wings, are there any financial tools available to distressed borrowers that haven't been tried yet? And is there a way to help owners that won't rack up huge federal expenditures and add to the deficit?

The Obama administration has been exploring options — including a new refinancing program expected this month — but a concept has surfaced on Capitol Hill that might offer modest help with no revenue cost to the government: Amend the tax code to allow homeowners who have 401(k) retirement plans to pull out money to save their houses from foreclosure without the usual tax penalties.

That is a horrible idea. Retirement accounts are supposed to be protected. If you allow loan owners to sacrifice their retirements to save the banks, what we will end up with is millions of people with no retirement savings in order to save the banks. I think that is terrible.

The change would work like this: Under current rules, anyone making what's known as a “hardship” early withdrawal of funds from their 401(k) must pay the IRS a 10% penalty on top of ordinary income taxes. A bill introduced Oct. 5 would waive the penalty if the purpose of the distribution is to make loan payments to avoid loss of a primary home to foreclosure.

Saving the banks is a special hardship now? This proposal makes me particularly angry. A foreclosure would eliminate the hardship, and the loan owners would adjust to life in a rental — with their retirement savings safely protected.

Co-written by Sen. Johnny Isakson and Rep. Tom Graves, both Republicans from Georgia, the bill would allow owners to pull out up to $50,000. The money could be used in a lump sum to pay down the delinquent mortgage balance or to fill shortfalls caused by reductions of household income.

Using retirement savings to bail out lenders or support a family's current lifestyle is a really bad idea.

It could also be used as part of loan modification agreements with lenders designed to avert a foreclosure. No matter how the money is used to resolve the mortgage delinquency, it would need to be spent within 120 days of receipt and could not exceed 50% of the funds in the retirement account.

Owners would still be subject to income taxes on the amounts withdrawn.

Good. That will likely stop most people from doing it.

Though neither of the co-sponsors assert that the bill would raise revenue — they simply say it won't cost the government anything — some retirement program experts say it might. Edward Ferrigno, vice president for Washington affairs at the Plan Sponsor Council of America, a group that represents employers that offer workers 401(k) accounts, said that by triggering taxable distributions from otherwise untouched, tax-deferred plans, the bill “should generate revenues.” Ferrigno declined to comment on the bill overall, pending further review of its provisions.

Titled the HOME Act, short for Hardship Outlays to protect Mortgagee Equity Act,

Protect mortgage equity? These government labels and acronyms are misleading. If these people had any equity in their properties, they could merely sell them and pay off the loan. Nobody with equity needs this money. It's the loan owners who will take the money.

the proposal sheds light on the potential foreclosure-avoidance resources — and the drawbacks — connected with tapping employee retirement accounts. Many, but not all, 401(k) plans allow loans to participants, including for housing-related purposes. Retirement advisors generally recommend taking a loan from a plan because the money withdrawn is not taxed or penalized. Borrowers are required to pay interest on the loan, but in effect they are paying it to themselves to offset any earnings lost on the balances taken out.

Many 401(k) plans also allow “hardship” withdrawals. But these come with much stricter rules and fewer eligible uses, plus the tax penalties. The Internal Revenue Code limits hardship distributions to situations in which there is an immediate and urgent financial need and there are no other funds available to meet this need. On top of that, the rules require that taxpayers must opt first for a loan from the retirement plan — if permitted — before pursuing a hardship withdrawal.

Though avoiding foreclosure is one of the permitted hardship uses under the code, the 10% penalty discourages potential users, Isakson and Graves argue. Their bill would remove that disincentive and provide an emergency escape hatch for owners sliding fast toward foreclosure.

I have a better idea for legislation: remove “avoiding foreclosure” from the list of permitted hardships. Rather than make it easier for people by removing the penalty, we should make it harder for people to waste their retirement money in this manner.

Putting aside the potential positives, are there downsides to making a hardship withdrawal from your 401(k), even penalty-free? You bet. Pulling out 401(k) dollars early — with or without a tax penalty — is still an expensive way to raise money. Not only does it deplete the tax-deferred savings you've set aside, but in the case of hardship withdrawals you are prohibited by IRS rules from making new contributions to your plan for six months.

It is a very expensive way to raise money. When someone takes money out of a retirement account, it isn't just the loss of the money, it's the loss of the growth of that money over time that gets really expensive.

Even if the HOME bill makes it through Congress — and there's no assurance it will — taking the hardship route should never be your first choice. It should be your last resort, when there's nothing else that will save your house and you don't want to walk away.

Most people who would consider this option would be better off if they walked away.

But also consider the retirement plan alternative that may already be buried away in your plan documents: a save-the-house loan to yourself. If the numbers work, and you have a reasonable chance of avoiding foreclosure and repaying the loan, check it out. It just might be your solution.

kenharney@earthlink.net

So what do you think, IHB readers, should loan owners be allowed to take money out of their retirement accounts without penalty to give to the bank?

Short sale caused my HELOC abuse

The owner of today's featured property is selling short despite the small profit on the transaction. If not for the HELOC abuse, this would not be a short sale. Of course, if not for the HELOC abuse, this owner wouldn't have had the pleasure of blowing over $300,000 either.

• The property was purchased on 6/8/2003 for $551,000. The owner used a $440,800 first mortgage, a $51,100 second mortgage, and a $51,100 down payment.
• On 3/19/2004, only 9 months later, he refinanced with a $502,001 first mortgage and a $60,000 HELOC.
• On 4/25/2005 he got a $100,000 HELOC.
• On 8/7/2006 he obtained a $700,000 first mortgage and a $87,450 HELOC.
• Assuming the final HELOC was maxed out, the total property debt was $787,450, and the mortgage equity withdrawal was $295,550.

$300K in three years. Not bad.

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This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 43 SPARROWHAWK Irvine, CA 92604

Resale House Price …… $579,000

Beds: 4

Baths: 3

Sq. Ft.: 2129

$272/SF

Property Type: Residential, Single Family

Style: Two Level, Contemporary

Year Built: 1976

Community: Woodbridge

County: Orange

MLS#: S675445

Source: SoCalMLS

Status: Active

On Redfin: 12 days

——————————————————————————

Fabulous opportunity to own this outstanding home in Woodbridge, 4 bedrooms, 3 baths with one bed and bath downstairs, nice sized back yard, Formal living and dining room, breakfast nook, family room, open and spacious. Just walking distances to all the ammenities that Woodbridge has to offer

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Proprietary IHB commentary and analysis

Resale Home Price …… $579,000

House Purchase Price … $551,000

House Purchase Date …. 6/8/2003

Net Gain (Loss) ………. ($6,740)

Percent Change ………. -1.2%

Annual Appreciation … 0.6%

Cost of Home Ownership

————————————————-

$579,000 ………. Asking Price

$115,800 ………. 20% Down Conventional

4.20% …………… Mortgage Interest Rate

$463,200 ………. 30-Year Mortgage

$115,067 ………. Income Requirement

$2,265 ………. Monthly Mortgage Payment

$502 ………. Property Tax (@1.04%)

$0 ………. Special Taxes and Levies (Mello Roos)

$121 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$85 ………. Homeowners Association Fees

============================================

$2,973 ………. Monthly Cash Outlays

-$372 ………. Tax Savings (% of Interest and Property Tax)

-$644 ………. Equity Hidden in Payment (Amortization)

$174 ………. Lost Income to Down Payment (net of taxes)

$92 ………. Maintenance and Replacement Reserves

============================================

$2,223 ………. Monthly Cost of Ownership

Cash Acquisition Demands

——————————————————————————

$5,790 ………. Furnishing and Move In @1%

$5,790 ………. Closing Costs @1%

$4,632 ………… Interest Points @1% of Loan

$115,800 ………. Down Payment

============================================

$132,012 ………. Total Cash Costs

$34,000 ………… Emergency Cash Reserves

============================================

$166,012 ………. Total Savings Needed

——————————————————————————————————————————————————-

Larry Roberts and Shevy Akason will host a first-time homebuyer workshop at 6:30 PM Wednesday, October 26, 2011, at the offices of Intercap Lending (9401 Jeronimo, Suite 200, Irvine, CA 92618). Register by clicking here or email us a sales@idealhomebrokers.com.

Larry Roberts will be hosting a Las Vegas Cashflow property workshop at 8:00 at the same location.

The Irvine housing market has five months of supply of homes available for sale which represents almost a 20% increase over last month's measure.

Irvine Home Address … 21 UPLAND Irvine, CA 92602

Resale Home Price …… $899,999

Well I'm takin' my time, I'm just movin' along

You'll forget about me after I've been gone

And I take what I find, I don't want no more

It's just outside of your front door.

Boston — Foreplay/Long Time

Houses are taking a long time to sell in Irvine today. It's rare to see this kind of weakness in Irvine. Usually, the constricted supply keeps prices elevated and makes the pace of sales relatively brisk. That is not today's market.

Months of supply is a good indicator of macro trends impacting the US housing market. The chart below from Calculated Risk shows the strong correlation between months of supply and the change in price.

Months of supply is my least favorite indicator of market action on a local level. It's too volatile, and it says little about the forces underlying the market. The smaller the area, the more volatile it becomes because there are so few data points. Of course, that doesn't mean realtors don't try to use it. Since it is volatile, it's relatively easy to make note of recent changes and blow them out of proportion to create false urgency.

Irvine homes take 9% more time to sell

By JONATHAN LANSNER — October 12, 2011

One analysis of real estate for sale in Irvine shows the market speedier in its last tabulation.

Every two weeks, Orange County broker Steve Thomas publishes a report on the supply of local homes for sale. Here's what the latest report — as of Sept. 29 — has to say about Irvine …

• 769 residences listed in brokers' MLS system with 196 new deals opening in the past 30 days.
• By Thomas's math, this community has a “market time” (months in would take to sell all inventory at current pace of new escrows) of 3.92 months vs. 4.00 months found two weeks earlier vs. 4.77 months seen a year earlier. Countywide, latest market time was 3.61 months vs. 4.28 months a year ago.
• So, homes in this community sell — in theory — in 9% more time than the countywide pace.
• Of the homes listed for sale in this community, 203 were either foreclosures being resold or short sales, where sellers owe more than the home's value. So distressed properties were 26.4% of supply of homes for sale vs. 34.7% countywide.
• Homes for sale in Irvine represent 7.4% of Orange County inventory — and 5.7% of all the distressed homes listed for sale in Orange County. New escrows here are 6.8% of all Orange County's new pending sales.

Compare these trends to countywide patterns:

• Cities with highest level of distressed properties among their listings? Lake Forest was tops — 59.0% — followed by Santa Ana at 58.5% of listings and Anaheim at 58.3% of listings.
• Fewest? Seal Beach was tops — 4.1% — followed by Corona Del Mar at 5.0% of listings and Newport Coast at 6.7% of listings.

I have a problem with Steve Thomas's math. Rather than use the accepted method of calculation — inventory divided by closed sales — Thomas uses opened escrows, a number always larger than closed sales because many properties fall out of escrow. By making the denominator of this fraction larger, he consistently understates the actual months of supply. Closed sales is an easy number to obtain from the MLS data, so there is no reason to use opened escrows over closed sales other than the desire to make the months of supply look smaller. A smaller month of supply number makes the market look better than it really is, and appears to be intended to create false urgency in buyers.

Below are the actual calculations of months of supply done properly for Irvine over the last two months by zip code. The volatility of the numbers is apparent. The increase in months of supply from 4.3 to 5.0 is nearly a 20% increase from August to September.

Zip codes that were disasters in August were healthy in September and visa versa. The usefulness of this information is suspect. How should someone use this data? Should buyers accelerate their plans or put them off? What about sellers? I doubt many people base their decisions on this data, nor should they.

From the post yesterday, 92603 (Turtle Rock, Turtle Ridge and Quail Hill) are the villages showing the most recent weakness, and the months of supply does reinforce that idea. Aggregate numbers are somewhat more accurate because they are less susceptible to small changes in inventory or sales. The aggregate numbers for Irvine also show the increased months of supply caused by hefty inventories and slow sales. However, months of supply is generally going to increase in September and October because sales drop off faster than inventory is removed from the market. It's November when sellers typically give up and hibernate for the winter. The sellers active from mid-November through February are the most motivated.

Horrible realtor ad of the day

Home ownership is under attack… or is it that loan owners are not being responsible with their payments? From the video below, you would assume responsible people are being forced out of their homes. The reality is irresponsible people are being forced out of the bank's home.

25%-30% off the high end

The owners of today's featured property paid $1,200,000 in the summer of 2005 using a $959,900 first mortgage and a $100,000 HELOC. The house appreciated for a year, and they increased their mortgage to a $1,000,000 first mortgage and a $96,500 HELOC. It appears they have been dutifully paying the mortgage ever since.

However, most people who attempt a short sale aren't paying their mortgage, so they could be delinquent and in shadow inventory (delinquent on the mortgage and no notices filed). In any case, their asking price is 25% less than they paid, and if it sells, they will lose their down payment, and the lender will be out a nice chunk as well. This is the kind of short sale that will take forever to get approved as the lenders will not want to absorb the loss and the borrower will not want to pay the difference.

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This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 21 UPLAND Irvine, CA 92602

Resale House Price …… $899,999

Beds: 6

Baths: 4

Sq. Ft.: 3100

$290/SF

Property Type: Residential, Single Family

Style: Two Level, Mediterranean

View: Mountain, Yes

Year Built: 2001

Community: Northpark

County: Orange

MLS#: S659815

Source: SoCalMLS

On Redfin: 146 days

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Spectacular luxury gem neslted in highly sought-after gated neighborhood on quiet cul de sac. Loaded with opulent finishes and offering ample natural light – this gem will be the pride of any homeowner. Great features include: beautiful hardwood and/or travertine flooring. Great yard ideal for entertaining. WOW!

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Proprietary IHB commentary and analysis

Resale Home Price …… $899,999

House Purchase Price … $1,200,000

House Purchase Date …. 6/22/2005

Net Gain (Loss) ………. ($354,001)

Percent Change ………. -29.5%

Annual Appreciation … -4.4%

Cost of Home Ownership

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$899,999 ………. Asking Price

$180,000 ………. 20% Down Conventional

4.20% …………… Mortgage Interest Rate

$719,999 ………. 30-Year Mortgage

$179,552 ………. Income Requirement

$3,521 ………. Monthly Mortgage Payment

$780 ………. Property Tax (@1.04%)

$0 ………. Special Taxes and Levies (Mello Roos)

$187 ………. Homeowners Insurance (@ 0.25%)

$0 ………. Private Mortgage Insurance

$150 ………. Homeowners Association Fees

============================================

$4,638 ………. Monthly Cash Outlays

-$825 ………. Tax Savings (% of Interest and Property Tax)

-$1001 ………. Equity Hidden in Payment (Amortization)

$270 ………. Lost Income to Down Payment (net of taxes)

$132 ………. Maintenance and Replacement Reserves

============================================

$3,215 ………. Monthly Cost of Ownership

Cash Acquisition Demands

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$9,000 ………. Furnishing and Move In @1%

$9,000 ………. Closing Costs @1%

$7,200 ………… Interest Points @1% of Loan

$180,000 ………. Down Payment

============================================

$205,200 ………. Total Cash Costs

$49,200 ………… Emergency Cash Reserves

============================================

$254,400 ………. Total Savings Needed

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The US economy and housing market is suffering due to the excessive debts taken on during the housing bubble.

Irvine Home Address … 36 ALCOBA Irvine, CA 92614

Resale Home Price …… $449,000

The best things in life are free

But you can keep 'em for the birds and bees.

Your lovin' give me a thrill

But your lovin' don't pay my bills.

Money don't get everything it's true.

What it don't get I can't use.

Well now give me money (that's what I want)

A lot of money (that's what I want)

Whoa,yeah you know I need to be free (that's what I want)

Oh, now give me money money! (that's what I want)

The Beatles — Money

Money won't buy happiness, but it can provide the finest forms of misery. Everyone wants money. If given the chance to do nothing and obtain money, most people would take it. Such was the lure of the housing bubble.

People only had to do two things to obtain copious amounts of cash. First, they needed to buy a house. Then they needed to find a lender who would give them money for signing some paperwork. That's it. No work, no skills, no risk, no sacrifice, nothing. Buy a house, sign some papers, and anyone could obtain hundreds of thousands of dollars. It shouldn't be surprising that kool aid intoxication is so strong. Who wants to give up on that deal?

Unfortunately, as with most things in life that are too good to be true, the housing boom was not real or sustainable. Equity is an illusion, but debt is very real. The debt hangover is still plaguing the country. Our banks are imperiled by the toxic debts polluting their balance sheets, and borrowers are burdened by debt service payments to the ailing banks. This debt service is money that could be circulating in the economy as demand for goods and services. Instead, the money that should be creating aggregate demand is being sucked into the black hole of banking losses and dragging down the entire economy.

Housing's Job Engine Falters

Employment Lost in Property Crash Weighs on the Economy's Chance of Recovery

By S. MITRA KALITA — October 5, 2011

HAGERSTOWN, Md.—Joshua Bradley says it was the easiest job he ever had: power-washing windows of new suburban houses. Then, about three years ago, business dried up and he found himself out of work.

“People don't want to get anything done to their houses anymore,” says Mr. Bradley, 28 years old. “They do it themselves to save money.”

His experience wasn't unusual.

Over the past decade, the housing market has been a powerful engine: It helped the U.S. economy out of a recession and created jobs as construction firms took on workers and new homeowners hired contractors to decorate rooms and maintain the lawns, or purchased new furniture for indoors and outdoors.

But today, as the sector endures a prolonged slump, many of the jobs it created are gone, and housing has now become part of what many economists see as a vicious circle that has left the wider economy struggling to gain altitude.

Americans aren't spending because their home values are declining and employment prospects are dimming, and housing and employment is struggling because Americans won't spend.

“People are losing their jobs and never getting equivalent jobs,” says Yale University economist Robert Shiller. “That fear is spooking everyone, so people aren't in a mood to expand.”

It isn't that people won't spend, they can't spend. Borrowers everywhere have too much debt, and they aren't being given more Ponzi loans to make payments and buy more stuff. It's the natural result of a massive credit binge. Take a look at the size of the green area representing disposable income in the chart below.

In the past 10 years, housing and related sectors grew to represent an outsize portion of the economy, accounting for 16.8% of GDP in 2005, according to Capital Economics. That fell to 13% in the second quarter of this year, the lowest share since 1982.

“The whole U.S. economy in this last decade was built on housing and the services that come with it: mortgages, moving, furniture,” says Steve Blitz, director and senior economist at ITG Investment Research in New York.

Our HELOC economy has collapsed.

That is evident in such boom-to-bust markets as Hagerstown. Like Mr. Bradley, many now-unemployed workers in the city, which lies 75 miles from Washington, D.C., had a direct or indirect connection to housing. Some worked in the construction jobs supported by the surge in development; others worked in nearby distribution centers for retailers such as PetSmart and Staples, where new homeowners shopped. Some created small businesses catering to new residents, often tapping into home equity to do so.

Does anyone else think this is a bad idea? Is it wise to risk the family home on a business start up?

But then the housing bust arrived. The number of building permits for new construction in Hagerstown fell nearly 75% between 2006 and 2010, from 212 to 55, according to Sage Policy Group Inc., a Maryland economic-consulting firm. In July, the median price of a home in Washington County was $130,450, down nearly 45% from its $235,000 peak reached in June 2007.

Unemployment in the city has been particularly stubborn, climbing to 11.3% in June from 10.7% a year earlier. The national rate fell from 10.5% to 9.8% over the same period.

During the boom years, Hagerstown ranked among the highest for positive mortgage equity withdrawal—meaning people pulling cash out of their houses. Now, it ranks among the most negative, meaning families are defaulting or paying down debt, according to Moody's Analytics.

Hagerstown was taken over by Ponzis. The few who didn't participate get to pay the price in government bailouts and lowered property values.

On a recent afternoon, amid vacant storefronts and “for rent” signs, Karla Auch stood before her downtown gift shop, the Rainbow Connection, opened six years ago with a home-equity loan. “Going out of business,” announces a sign on the front.

“A lot of new businesses came in with all the people. We tried. It never really boomed,” Ms. Auch says.

People such as Charles Wible, a lifelong Hagerstown resident who left school in the 11th grade, see an uncertain future ahead. Mr. Wible, 39 years old, installs garage doors and says he had a nice life during the housing boom.

“Ten years ago, I was making $60,000 a year and working half as hard as I am now,” he says. “Now I'm making $25,000 a year and scrounging for work.“

Everyone who depended on real estate is facing this problem. How many realtors are complaining about the same issue?

The loss of jobs and businesses has led to high foreclosure rates across the U.S.; according to the National Association of Realtors, 31% of transactions in August were distressed sales. Credit, meanwhile, is tight, and banks are loath to lend in areas like Hagerstown, with home prices still falling.

Hagerstown resident Machiel van de Geer says he and his neighbors take turns mowing the lawn of foreclosed properties.

There is no obvious fix to the city's economic quandary—or the country's. “The only solution here is jobs,” says Anirban Basu, chairman and chief executive of Sage Policy Group and an expert on Maryland's economy. “In the absence of a resurgence of employment, a recovery in Hagerstown's housing market is impossible.”

But where the jobs will come from remains elusive. Mr. Bradley, for example, switched industries and found work as a shift supervisor at the Hard Times Café, a local restaurant. But every day brings a slew of people just like him to the restaurant looking for work, he says.

“We've got to invest in software, technology, manufacturing,” says Mr. Blitz, the ITG economist. “It's these industries that will create more jobs and income. We are transitioning from an economy built around the leverage on housing and finance to an economy built on real goods.”

The economy won't recover until some sector other than real estate creates new jobs. Once some other sector creates jobs, new households will form which will in turn create demand for real estate. With fresh demand for real estate, housing employment will start to recover, and the demand will snowball from there. The catalyst will not be housing. It must start in another sector of the economy.

Here, officials point to a business-technology park under construction. It would link Hagerstown Community College with the city's new hospital, in hopes of spurring jobs in biotechnology, health sciences and information technology.

For some it will come too late. Mr. Wible says he didn't expect a turnaround in his lifetime, so he's banking on his four sons.

“They are not building houses like they used to,” he says. “So I try to instill in my boys to stay in school. I don't want my boys out there fighting for work like I have to.”

—Nick Timiraos contributed to this article.

That is capitulation.

HELOC Abuse and Pascal's Wager

During the housing bubble, I can remember having conversations with kool aid intoxicated fools concerning house prices and mortgage debt. They would tell me house prices only go up, so it doesn't matter how much you borrow because the house will always pay for it. When the debt became expensive, you could serial refinance into one teaser rate Option ARM after another.

When I suggested that lenders may not always offer these teaser rates and that cheaper and cheaper credit might not always be made available, most scoffed at me as a fool who didn't understand California real estate finance. When i asked people to tell me what would happen if house prices did not go up, or if interest rates went up, or if credit became tight, they would look at me with a blank stare or tell me I worried about stuff that would never happen.

Whenever I had these conversations, I was always reminded of Pascal's Wager. Pascal's Wager is an idea from philosophy first postulated by Blaise Pascal. He believed a rational person should wager as though God exists, because living life accordingly has everything to gain, and nothing to lose. So it is with HELOC debt.

I was always under the belief system that one should not wager the family home on the necessity for prices to always increase and cheap debt to always be made available. Many California loan owners wagered their family homes for a little spending money… well, actually a lot of spending money. But no matter what benefit people thought they would obtain from borrowing irresponsibly, they should never have wagered their family homes on it. They did make this wager, and they all lost. Given the stupidity of that mistake, it's hard to feel too sorry for them.

Keeping up appearances

Many people fell victim to HELOC abuse due to their own frailties of ego. Far too many were trying to keep up with the Joneses while the Joneses were juicing on a HELOC high. I have no idea what motivated the owners of today's featured property to spend their home, but they bought before the bubble began to inflate, and they are now a short sale. They wouldn't have this problem if they wouldn't have tripled their mortgage debt.

• Today's featured property was purchased on 6/8/2000 for $260,000. The owners used a $208,000 first mortgage and a $52,000 down payment.
• On 3/17/2003 they obtained a $100,000 HELOC.
• On 7/25/2003 they enlarged the HELOC to $133,000.
• On 8/27/2004 they opened a $250,000 HELOC.
• On 12/12/2005 they refinanced with a $434,000 first mortgage.
• On 4/4/2006 they obtained a $200,000 HELOC.
• On 5/9/2008 they got a $300,000 HELOC.
• On 5/14/2009 they got another loan for $150,000.
• On 8/25/2011 they got one last loan for $108,000.
• Total property debt is $734,000 based on the $434,000 first and the $300,0000 HELOC.
• Total mortgage equity withdrawal is $526,000.

These borrowers withdrew more money in HELOCs and refinances than the house is currently worth!

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This property is available for sale via the MLS.

Please contact Shevy Akason, #01836707

949.769.1599

sales@idealhomebrokers.com

Irvine House Address … 36 ALCOBA Irvine, CA 92614

Resale House Price …… $449,000

Beds: 3

Baths: 2

Sq. Ft.: 1610

$279/SF

Property Type: Residential, Single Family

Style: Two Level, Modern

Year Built: 1989

Community: Westpark

County: Orange

MLS#: P798921

Source: SoCalMLS

Status: Active

On Redfin: 2 days

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A great opportunity to own in the heart of Irvine. This nice home is located in a quiet community. Open floor plan with a bright and airy high-vaulted ceiling. This home features 3 spacious bedrooms and 2.5 baths. 2 car direct access garage w/ lots of space for storage. Wood floors all throughout the house. Nice sized backyard, good for relaxation. Homeowner's Association includes pool and spa. Convenient location. Award-winning schools: Culverdale, Westpark, SoLake Middle School and University High.

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Proprietary IHB commentary and analysis

Resale Home Price …… $449,000

House Purchase Price … $260,000

House Purchase Date …. 6/8/2000

Net Gain (Loss) ………. $162,060

Percent Change ………. 62.3%

Annual Appreciation … 4.8%

Cost of Home Ownership

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$449,000 ………. Asking Price

$15,715 ………. 3.5% Down FHA Financing

4.03% …………… Mortgage Interest Rate

$433,285 ………. 30-Year Mortgage

$131,575 ………. Income Requirement

$2,076 ………. Monthly Mortgage Payment

$389 ………. Property Tax (@1.04%)

$50 ………. Special Taxes and Levies (Mello Roos)

$94 ………. Homeowners Insurance (@ 0.25%)

$498 ………. Private Mortgage Insurance

$292 ………. Homeowners Association Fees

============================================

$3,399 ………. Monthly Cash Outlays

-$323 ………. Tax Savings (% of Interest and Property Tax)

-$621 ………. Equity Hidden in Payment (Amortization)

$22 ………. Lost Income to Down Payment (net of taxes)

$76 ………. Maintenance and Replacement Reserves

============================================

$2,554 ………. Monthly Cost of Ownership

Cash Acquisition Demands

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$4,490 ………. Furnishing and Move In @1%

$4,490 ………. Closing Costs @1%

$4,333 ………… Interest Points @1% of Loan

$15,715 ………. Down Payment

============================================

$29,028 ………. Total Cash Costs

$39,100 ………… Emergency Cash Reserves

============================================

$68,128 ………. Total Savings Needed

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Shevy Akason and Larry Roberts will host a short sale and REO workshop at 6:30 PM Wednesday, October 19, 2011, at the offices of Intercap Lending (9401 Jeronimo, Suite 200, Irvine, CA 92618). Register by clicking here or email us a sales@idealhomebrokers.com.